The State of Deregulation (Competition) in Power Markets

California’s grand experiment with power market deregulation ended with a bang in 2001, when Enron-engineered rolling blackouts and Pacific Gas & Electric went bankrupt. But in Texas, power market deregulation — or competition, as folks down here prefer to name it — is in full swing. What examples might the Lone Star state provide for the rest of the country?

Texas’ power market is split up between power generators, the utilities that transmit and distribute it to end users, and the REPs that sell it to customers. ABCs connect those REPs to customers, and are expected to protect their customers’ interests as they seek to secure the best deals from power retailers and other power market players such as demand response providers.

Competitive power market customers in those states add up to about 600 terawatt-hours, a little less than one-sixth of the country’s total power usage of 3,800 TWhs, Taff Tschamler, executive director of utility consultancy KEMA, said Thursday. That competitive power market was worth about $45 billion this year, and that included gross margins of some $5 billion for participating retail power providers, he said.

Tschamler said that another 1,300 TWhs in the U.S. could well be “eligible” for a shift to competitive markets, as a count of potential customer bases in deregulated states that haven’t yet taken the plunge. Not all of that is likely to be captured, however. KEMA predicts that competitive power markets will grow to about 700 TWhs by 2015 or so.

About half of all commercial and industrial (C&I) power consumers in the U.S. now buy power in competitive markets, Tschamler said. That’s a figure that has gone up from about 25 percent in 2003, and could grow to about 60 percent of all C&I customers by 2015, as more and more take advantage of increasing technological and market sophistication to use power when it’s cheap and lower use when prices are high.

The political equation is key to the deregulation picture, he added. In 2009, about $90 million was spent in lobbying state and federal legislatures against “customer choice,” he noted, compared to some $17 million spent to support it.

Competitive power markets are meant to leverage profit motives to get utilities to work harder, cut costs, maximize regulated returns on investments and deliver power more cheaply. One TEPA conference attendee I spoke to cited Homer Simpson in relating his experience in switching over Chicago-area utility Commonwealth Edison to a deregulated model.

ComEd, he said, was running many of its nuclear power plants at only 60 percent capacity when he came to help them meet Illinois deregulation mandates, and their payback had already been guaranteed in a rate case. When he left, those plants — under a new ownership structure — were running at 95 percent capacity, he said.

But deregulation also opens power consumers to the sometimes-wild swings in commodity pricing for natural gas, the nation’s top heating fuel as well the feedstock for the power plants that cover the peaks and valleys of our nation’s demand for electrical power. It can also open up power consumers to manipulation from utilities and power brokers that use their more complete knowledge of the market to secure higher profits for themselves at the expense of their customers.

Indeed, deregulated states paid about 30 percent more for their power in 2007 than regulated states, up from a 24 percent gap in 1990, according to an Associated Press analysis of Department of Energy data. Of course, that was during a time of generally rising natural gas prices. Since the economic downturn and opening of new resources, prices for natural gas have fallen significantly, and as many conference participants noted to me, with natural gas prices this low, it’s hard to justify spending much on energy efficiency.

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